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The Ministry of New and Renewable Energy (MNRE) is currently in the process of finalizing guidelines for 5,000 MW of new solar projects with National Thermal Power Corporation (NTPC) as an off-taker. These projects are expected to be tendered over the next three years with actual timing and geographical spread depending on demand from power utilities. Draft guidelines are expected to be released over the next 2 months.

NTPC may fix the solar power tariff at INR 4.50/kWh (US 6.7 cents/kWh) and ask developers to bid for an additional Generation Based Incentive (GBI) per unit of electricity

A concept similar to deemed generation is likely to be introduced for the first time for solar power procurement in India

The move to GBI is preferable over viability gap funding (VGF) structure as it incentivises better performance and encourages quality consciousness

NTPC sells solar power from previously tendered projects to utilities together with cheap power from older thermal power plants on a bundled basis to lower the effective cost. However, due to limited availability of older thermal power, MNRE and NTPC are proposing to do away with the bundling mechanism. Instead, power from the new projects is proposed to be sold to utilities at a fixed tariff of INR 4.50/kWh (US 6.7 cents/kWh), the level at which state utilities would be comfortable to procure. Project developers will be compensated for any deviation in their tariff expectation – positive or negative – through GBI, determined under a competitive bidding process.

MNRE is believed to be putting aside a financial corpus of INR 10-15 million/MW (USD 0.15-0.22 million/MW) for GBI payments during the project life. Based on recent tenders and softening cost trends (refer), we expect actual GBI for future projects to be close to zero or even negative. But the move to GBI, a generation or performance linked payment mechanism, is preferable over viability gap funding (VGF) structure as it incentivises better project performance and encourages quality consciousness.

BRIDGE TO INDIA understands that the new guidelines also incorporate some mitigation of grid curtailment risk, a growing concern for project developers. The guidelines propose compensation for up to a defined of deemed generation per annum by way of allowing developers to sell equivalent amount of excess power generation in subsequent years. The structure is very restrictive and not sufficiently attractive but the introduction of deemed generation as a concept is very promising for developers. We expect that the compensation structure will improve over time.

With both NTPC and Solar Energy Corporation of India (SECI) implementing their individual schemes to award 5,000 MW of solar capacity to private sector developers, there should be a clear visibility of demand in the Indian market for the next 2-3 years.